The separation of Fairfax and Domain: Where does that leave Fairfax?
Following on from Fairfax Media’s announcement it will spin off its real estate business Domain as a separately-listed ASX entity, Miranda Ward asks what the move will mean for Fairfax?
Fairfax Media has taken the first step in separating its real estate business Domain Group out and listing it on the ASX. Greg Hywood, boss of the publishing company, said the time was right, telling investors Domain was an established business so it is now “less reliant” on Fairfax. But what Hywood didn’t mention was how reliant Fairfax as a company has become on Domain’s revenue to offset trouble in the traditional arms of the business.
Financial results for Fairfax demonstrate Domain’s role as the company’s earnings driver – the figures for the six months ended December 31, reported yesterday, saw Domain Group post the largest earnings before interest, tax, depreciation and amortisation (EBITDA) of the company, at $57.3m. Domain Group was also one of only two divisions to post growth in revenue (the other being Macquarie Media), while the Metro Media saw its revenue decline by 8.2% year-on-year.
Hywood is right, it is clear Domain is not reliant on Fairfax anymore. It is time the real estate listings business gets its own valuation. But where does that leave Fairfax?
There’s a more fundamental question here, which is: what’s the point?
Investors wanted the separation so they can have a clean shot at Domain without the rest of Fairfax. But the “float” is not a float, but a listing of 30% of Domain. So Fairfax will continue to consolidate the Domain activity.
Fairfax might have wanted to raise some cash to invest for diversity. But they are not raising any cash.
Given the fact that Domain is not a business, but an accounting “segment” that can’t be treated as a business unit in the current accounts, the real question is: what exactly is the business?
On the face of it, Domain has a big reliance on print. The reporting suggests that digital is the growth part – but there is no way of knowing how much of the whole business relies on print inventory that is on very shaky ground.
The most staggering part of this story is that expenses for Metro Media Division grew by 7.6 per cent in the last year. It’s hard to fathom how these costs can rise so substantially while quality diminishes. Some print executives will quietly say the industry hasn’t begun to take its medicine yet. While journos think recent cuts have been harsh, that figure suggests a lot worse is to come.
Hi Paul. That 7.6% relates to an improvement in expenses from 272.9m to 252.1m. That is a decrease. Perhaps you may require some lessons in financial literacy.
Have you read that right? According to the numbers released yesterday metro costs decreased 7.6%.
If you look around, you’ll notice the volume of real estate listings has substantially declined. Take a look at the performance of McGrath for a case in point.
This looks to me like they’re cashing in some chips as the cycle goes into decline.
Joking: if you are an insider perhaps you can explain the 44% increase in costs at the digital component of Domain. Noting that Domain already had a markedly poorer gross margin in digital than REA (which is roughly double Fairfax’s).
Good analysis Miranda.
city to surf and 50% of stan. lol
Domain margin declined 17.5% YoY.
I wonder what share of the ‘Increase in expenses of 19%’ was marketing expenses (i.e. SEM)?
Further – if the real estate industry goes through a subdued cycle soon, the number clear #2 (Domain) will likely suffer the most as agents trim their budgets and stick with #1 (REA).
On this basis.. a 17X-19X earnings multiple which has been spruiked in media over last 48 hours is laughable. 10X – 12X would be more prudent.
The reason Fairfax publicly talks about a future for print is so that they can optimise their negotiation position in the, likely inevitable, event of a sale or break up of Fairfax. The minute that they start talking about there being no future for print, from that moment the negotiation position has deteriorated. Given the performance of the papers in the metro division, the negotiation position in terms of achieving an attractive valuation is of course weak at the outset, but Fairfax will want to ensure that is still as good as possible.
Someone may be right, though I doubt it as no one is buying print media today. More likely with this management is that they change tune to suit the latest pie in the sky spin. Certainly there’s been no evidence of a plan.
I wonder when the print journalists and editors will realise they need to have content people want to read in order to sell papers. SMH print is down 56% from 10 years ago and 10% in the last year, the Age is the same. Compare this to the Telegraph 41% & 9%, Herald Sun 43% & 7%, Fin Review 45% & 8% and the Australian 27% & 5%.
Pretty soon if you want to be a print journalist you can either work for News or not work.
It does seem odd that according to The Oz, the Fairfax CEO has a large share incentive related to Domain performance. Given that a big chunk of Domain value is actually in the legacy business, that would appear to present some contradictions in terms of stakeholder interest?